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An ETF with Twice the Get-Up & Go
09/29/2006 12:00 am EST
Veteran value investor Richard Band is bullish on the stock market-so bullish that he is recommending a new exchange-traded fund for aggressive investors, one that is designed to produce returns double the S&P 500.
"We're closing in on the sweet spot of the stock market cycle-when the odds shift overwhelmingly in favor of the bulls for the next 18-24 months, perhaps longer. If you're an aggressive player, now is the time to look at ways you can magnify your profits as the market rebounds. This time around, I'm looking for big, high-quality names to lead the advance-the type of stocks that figure prominently in the S&P 500 index.
"The ProFunds group introduced a new exchange traded index fund called Ultra ProShares S&P 500 Fund(SSO ASE), designed to generate twice the daily performance of the S&P 500 index, after fees. Because it is tied to the S&P 500, it is well diversified among a list of America's largest and best-known corporations.
"The ProFunds family also sponsors a traditional mutual fund (UltraBull ProFund) that offers the same degrees of leverage as SSO. Why, then, would you prefer the exchange traded fund? Two major reasons:
"Like other ETFs, the Ultra ProShares S&P offering lets you buy or sell anytime during the business day, through any broker. With the old-fashioned fund, you must wait until the market closes to get in or out. And the ETF is cheaper to operate, with an expense ratio of 95 cents a year for every $100 invested, versus $1.44 for the conventional mutual fund. Lower fees mean more money in your pocket.
"SSO's liquidity is satisfactory, too, although I still recommend placing a limit order, which specifies the price you're willing to accept when you trade. Volume lately has averaged about $8 million a day. When the bull takes off, I expect interest in this and other leveraged index funds to rise dramatically. Even though margin calls aren't a problem, you should remember that SSO comes with its own set of risks. On down days, it will fall about twice as hard as the S&P. Accordingly, I recommend averaging into the fund during market pullbacks. In addition, setting a reasonable stop will keep any losses from getting out of hand.
"Buy SSO anytime the S&P is quoted intraday at 1240 or less. I suggest placing a stop (either mental or an actual stop order with your broker) 12% below your entry point to allow for normal marketing fluctuations. SSO is a nifty tool for introducing leverage into retirement accounts, which aren't allowed to buy stocks on margin."
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